DIAMOND DERIVATES – NOT A MERE CONCEPT ANYMORE

The possibility of trading diamonds as a commodity was discussed at two recent seminars in Antwerp, with the focus on diamond derivatives, which involve a contract to convey ownership of the asset, rather than the asset itself.

Martin Rapaport explained in his presentation “State of the Diamond Industry” in the first seminar, held on June 27 at Beurs voor Diamanthandel, his initiative of starting the world's first diamond-futures contracts for one carat diamonds, after receiving approvals from the U.S. Commodity Futures Trading Commission. Rapaport emphasised that diamond stakeholders, especially small the medium sized firms, will benefit from the proposal, which will push pricing transparency to a new level. The trading is being planned for weekly internet auctions, for individual polished diamonds between 1 carat and 1.2 carats, end-higher end-colors, clarities and cut. The single futures price would be indicated by a chart of prices for the various grades, with a cash settlement each month.

In the second seminar held on June 28 at the AWDC headquarters, a working panel established by PolishedPrices.com group, which is looking into the diamond derivatives market, held discussions with leading players such as the London Metal Exchange and ICAP, the interdealer group, the Chicago Board of Trade and Cargill. According to Charles Wyndham, founder of PolishedPrices, derivative contracts could be purchased within a year, but require their terms with reference to size, certification and delivery either physical or otherwise, to be set.

Loet Kniphorst, global group head of ABN AMRO diamond and jewellery group in Antwerp, quoted in the Financial Times, that with commercial funding being doubled for the diamond industry during the last five years, the derivates will give banks the advantage to reduce risk and allow clients to be rational. Freddy Hanard, CEO of the AWDC, interprets diamond derivatives to be a boost to the industry, with the contract giving big dealers a way to limit their risk.